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GFC came at right time: Stevens

“We have to negotiate the downward phase of the investment boom over the next few years" ... Reserve Bank of Australia Governor Glenn Stevens. Photo: Reuters

Reserve Bank governor Glenn Stevens says the global financial crisis and financial caution by households helped the country wade its way through the mining boom.

Mr Stevens added that the "prudent behaviour of households, together with some genuine caution by many firms", helped Australia successfully navigate the century-high boom in mining investment.

"Higher saving by the private sector has helped to ‘fund’ the resources investment boom at lower interest rates, and a lower exchange rate, than might have been the case otherwise," Mr Stevens said.

"I am not convinced we should lament that performance as much as we seem to do."

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Mr Stevens said while commentators have said Australia was "lucky" to have the mining boom, it could also be said that the country was "'lucky' that the effects of the global economic downturn worked to help reduce inflation in Australia from its peak in 2008 of 5 per cent – which was way too high – to something acceptable".

"It could also be said that we were fortunate that the sub-prime crisis in the US emerged from early 2007, and not later. Although such lending was less prominent in Australia at that time, it was growing fast and would have become a much bigger vulnerability had it continued at that pace."

“We have to negotiate the downward phase of the investment boom over the next few years, which appears likely to pose significant challenges,” he said today.

“Much depends on ‘confidence’ -- that intangible thing that is hard to measure and very hard to increase.”

The RBA left the cash rate unchanged at a record-low 2.75 per cent for the past two meetings as the currency slid 12 per cent last quarter, easing pressure on the economy. Policy makers lowered borrowing costs by 2 percentage points between November 2011 and May to spur industries, including residential construction, as mining investment wanes and China’s outlook remains clouded.

The Australian dollar dropped to 90.96 US cents, the lowest since September 2010, after Stevens said the currency has been too high for many areas of the economy.

“Previous handovers have occurred, largely successfully. That doesn’t guarantee the next one will, though it does mean that we shouldn’t assume that it won’t occur,” Stevens told the Economic Society of Australia Business Luncheon in Brisbane. “If the economy ‘needs’ a lower exchange rate, it will probably get it.”

Economy slowing

The Australian economy, which bucked the global recession in the wake of Lehman Brothers’s 2008 collapse, grew at its slowest annual pace in almost two years in the first three months of 2013. The Australian Industry Group’s gauges for manufacturing, services and construction have all shown a contraction since at least March 2012.

Stevens also urged the nation’s political parties to maintain their “strong commitment” to fiscal responsibility. “The importance of that commitment will, if anything, be heightened in the future, given that significant challenges exist over the medium term in funding government initiatives that the community appears to want,” he said.

Traders are pricing in a 40 per cent chance the RBA will reduce the key rate next month to a new record of 2.5 per cent. The RBA board deliberated for a very long time yesterday on their decision to maintain borrowing costs, Stevens said today.

Since the central bank unexpectedly cut rates on May 7, the Aussie has dropped about 10 per cent and suffered the biggest worldwide slide last quarter after the Syrian pound.

‘Too high’

“The exchange rate was somewhat too high for a period,” Stevens said. “It is no secret that I, for one, have been surprised that the foreign exchange market has taken as long as it has to reflect the fact that the terms of trade peaked some time ago - nearly two years ago, in fact. In the end, though, market-based exchange rates do eventually adjust.”

The governor said pressure from the sustained strength of the currency meant “efforts to improve productivity have been stepped up,” in Australia. “But we should still be asking whether there are things in the way of faster improvement,” he said.

Australia’s unemployment rate unexpectedly fell to 5.5 per cent in May from a revised 5.6 per cent, government data showed, and consumer confidence jumped 4.7 per cent last month as optimists outweighed pessimists in a private survey. Home prices in Australia’s state and territory capitals rose 3 per cent in the first six months of 2013, and 1.9 per cent in June, according to the RP Data-Rismark home value index.

“We have a better starting point going into this episode than we might have had, or than we have had on other occasions,” Stevens said today. “On this occasion, the resources boom - a bigger one than anything seen for at least a century - was accommodated without a big rise in inflation, or a big run-up in leverage or an unsustainable asset price boom.”